This Currency War Is About To Escalate To A Whole New Level, But The Biggest Currency Printers Will Be The Biggest Losers As The Economy Is Entering A ‘Virtuous Circle’

Mr. Abe better watch his back. The new prime minister of Japan is pissing a lot of people off.

He already has a beef with the Chinese because of disputes over the Senkaku Islands.

And now he’s making new enemies across Asia. As you know, he’s doing everything he can to devalue the Japanese yen to promote growth through exports.

Countries that compete with Japan in that arena have taken notice. Korea, for example, is one of Japan’s great competitors (think Samsung vs. Sony and Hyundai vs. Toyota). With a weaker yen, South Korean exporters will face more competition from cheaper Japanese exports.

This past week, South Korea’s finance minister said this: “our central bank will do whatever it’s supposed to do to protect the high volatilities in the financial sector.”

What he’s really saying is that the yen has fallen too much, too fast. His central bank will not allow it to continue. South Korea is getting ready to counterattack.

If you think what’s going on with the yen won’t affect you, you’re mistaken.

This war goes well beyond Japan. It’s a world currency war.

As Jim Richards said in his book Currency Wars, “the fate of economies and their affected citizens hang in the balance.”

Your fate hangs in the balance. Here’s why…

This War is About to Escalate to a Whole New Level

Currency wars are taking place across the globe. Several central banks are trying to devalue their currencies by keeping interest rates low, directly intervening in the market and even printing money.

The problem is they cannot all simultaneously devalue their currencies.

Currencies don’t trade in a vacuum. They trade against each other. So when the Japanese decide to devalue their currency, for example, other currencies become stronger.

But it is very easy to have a weak currency. All that is needed is an unlimited willingness to print. A strong currency requires real fiscal discipline and actual production. Yet, like the weight loss TV show, economists believe that the winner of a currency war is the biggest loser. You win not by killing your competitors, but by killing yourself!It’s like a student convincing his parents that an “F” is a better grade than an “A.” And if a straight “F” report card results in parental accolades rather than anger, the students will lack any incentive to improve performance. Similarly, as nations like Switzerland strive to reduce their own grades, the failing nations have a reduced incentive to change their study habits. Without outside support, nations with collapsing currencies would see huge increases in consumer prices. The resulting fall in living stands would force productive reform.

I take the minority position that just as it is better to be rich than poor, a strong currency is better than a weak one. Although much more credentialed economists may try to muddle the arguments, the truth may be seen when a particular position is taken to its logical extreme. If a weaker currency is preferable to a stronger one, then logic would dictate that a currency of no value will be preferable to one with an infinite value. But how would economies with these drastically different currencies operate?

WHEN you see a car being driven firmly within its lane and well under the speed limit, there’s nothing to worry about.

Or is there?

If you’re David A. Rosenberg, the glass-half-empty economist, there most certainly is. He says the world economy is like that car. And where others see stability and recovery, he sees “a car being driven by a drunk, lurching from side to side on the road, narrowly avoiding the ditches each time.”

At this particular moment, he says, the car happens to be in the middle of the road. But he can’t help but ask, “Is that because the driver has sobered up, or is it because the car is just passing through the middle on its way to the ditch on the other side?”

Mr. Rosenberg isn’t certain of the answer. But despite the cheer pervading the stock market and the relatively upbeat perspective of most economists, he says he isn’t convinced that the car will remain safely out of those ditches.